Dollar at a Critical Juncture

As we go through the first significant pullback in the market for 2012, the dollar seems to be at a turning point that should influence market trends for the next few months. Going all the way back to 2002, there has been a strong inverse correlation between stocks and commodities, and the US dollar. For the most part, the dollar has been falling during this period, which has helped drive cyclical bull markets in stocks and commodities. More recently, the stock market panic of 2008 and the first euro crisis of 2010 drove significant countertrend rallies in the dollar, and corrections in stocks and commodities.

Almost one year ago in April of last year the dollar put in another significant bottom and has been rallying ever since. The stock market and commodities suffered while the dollar moved higher in 2011, until the stock market put in a bottom in October. Since October, the dollar and stocks have been rallying together, and commodities finally put in a bottom in December 2011. And so far in 2012, we’ve seen a marginally lower dollar, and moves higher in stocks and commodities.